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At what point did you stop doing Roth conversions?
Old 11-18-2021, 10:59 AM   #1
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At what point did you stop doing Roth conversions?

Hi folks,

I'm 55 years old. I have been doing Roth conversions to the top of the 24% tax bracket for two years. While I'm slowly whittling down a tIRA the market continues to replenish the account (a good problem).

My plan has been to continue to convert until/unless the federal tax brackets revert in 2026 and push me into a higher bracket. I don't expect my future marginal tax rate to be lower than it is today, and probably it will be higher.

At the rate I'm going I won't come close to draining the tIRA before 2026. I won't convert beyond the 24% tax bracket so if current rates expire and revert then I'll have reached a stopping point. However, in the meantime I'm finding the conversion process expensive (paying taxes from cash accounts) and cutting into my ability to finance other priorities.

My question is when did you reach the "good enough" point and stop conversions? I realize everyone's situation is different but possibly there are some rules of thumb.

Some have suggested stopping once there's roughly equal amounts in tax-deferred and tax-free accounts. Or roughly equal amounts in tax-advantaged and taxable accounts. Others have focused on RMDs and trying to keep their taxable income low to avoid Medicare surcharges or taxes on Social Security. What was/is your stopping point?

Also, is there a tIRA size you would you consider too small to bother converting? I'm working on a $500k account, which is not very big now but by 2038 when I turn 72 the account could be 3x that size. I figured I'd best whittle it down now while the 2017 tax rates are in effect.
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Old 11-18-2021, 11:11 AM   #2
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I plan to stop when we're forced to take RMDs at age 70/72? I am converting to the limit of the 22% bracket, but we'll still have some TIRA money (about 1/3rd of what I started with).

As for "rules of thumb," to me the goal it so legally minimize lifetime taxes which for most is to keep your tax bracket the same before, during and after we start SS & RMDs on top of taxable dividends/STCGs. Needless to say some significant assumptions have to be made, but without conversions we would have been stuck with a much higher tax rate from age 70 until we both go poof...
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Old 11-18-2021, 11:39 AM   #3
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I plan to stop when we're forced to take RMDs at age 70/72? I am converting to the limit of the 22% bracket, but we'll still have some TIRA money (about 1/3rd of what I started with).

As for "rules of thumb," to me the goal it so legally minimize lifetime taxes which for most is to keep your tax bracket the same before, during and after we start SS & RMDs on top of taxable dividends/STCGs. Needless to say some significant assumptions have to be made, but without conversions we would have been stuck with a much higher tax rate from age 70 until we both go poof...
Just to add to this. There is a disconnect between the time you can use your T-IRA to do QCD (at age 70-1/2) and the maximum date you have to start RMDs (70-1/2 or 72 depending). The QCD is considered part of your RMD, if your donations don't equal your RMD for the year, you may need to take a taxable distribution to make up the balance.

I do both, a QCD plus RMD. It lets me reduce the balance further without paying taxes. The distribution isn't deductible as a charitable contribution because I didn't pay taxes on it.

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Old 11-18-2021, 02:33 PM   #4
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I will stop at 70 or 72, when I'm receiving SS and then RMDs. If I still have a lot left I will evaluate whether it's better for me to convert on top of RMDs, or let my heirs pay tax on it. Probably not, in case I have high LTC expenses later and can deduct those against income.

It doesn't make sense to me to stop earlier, because I expect to be in my lowest tax bracket until I'm 70, so I'd rather spread how much I plan to convert over the years to age 70 rather than convert more now, and none in my late 60s.

I'm sure there are a lot of individual factors on doing it differently, like being married and having the likelihood of one of us filing single later in life.
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Old 11-18-2021, 02:38 PM   #5
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I will stop doing them when they cease to provide a marginal tax rate arbitrage. Currently I'm projecting that to be "never", but I reevaluate regularly.
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Old 11-18-2021, 03:50 PM   #6
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The benefits of Roth conversion, particularly the part about paying taxes from a taxable account, decline the closer you come to withdrawing from the Roth. And of course you need a taxable account to pay your expenses plus the conversion taxes. SS and RMD's will start filling the lower tax brackets. 0% capital gains taxes may start looking better than Roth conversions if the marginal tax rates between now and RMD-time are decreasing. Any or all of those things may make Roth conversions inadvisable.

I start SS in about 3 years, Roth withdrawals in maybe 10 years. This year we switched from very large Roth conversions (pretty much at the same tax rate as RMD's) to only the top of the 10% bracket. That saves a bunch of space for 0% CG's. The conversions will stop completely when my SS starts up.

I use my own planning software to optimize our potential yearly spending, and that's what it came up with. Since it is all tax dependent, everyone's optimum will be different.
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Old 11-18-2021, 03:57 PM   #7
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Put your bonds in the IRA, then it won't grow much and you can stop doing conversions.
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Old 11-18-2021, 05:51 PM   #8
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Thanks for the great responses. Very helpful!
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Old 11-18-2021, 08:02 PM   #9
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Originally Posted by SecondCor521 View Post
...when they cease to provide a marginal tax rate arbitrage.
Probably the best answer.

Does require some guesswork on future marginal tax rates, but for example it may not be worth paying 24% now to drive a traditional balance to $0, because RMDs from a balance of "only" a few hundred thousand dollars may incur a much lower marginal rate.
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Old 11-18-2021, 08:23 PM   #10
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Old 11-18-2021, 08:32 PM   #11
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Haven’t started. Right now there is a greater advantage to keep my income low to obtain the lower healthcare costs. If things stay as they are, and they likely won’t, I can bag $100,000+ in HC savings prior to taking Medicare. Will reevaluate then.
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Old 11-18-2021, 08:43 PM   #12
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We’ll be in the top IRMAA bracket in 2022 because of a big conversion last year. The 401k/tIRAs are larger now than they were then. Our taxes for this year are already close to the top of the 24% bracket even with a lot of itemized deductions. AGI has about $15k breathing room before pushing us higher for IRMAA again. There’s no way we’ll be able to convert all of what’s left. I need to take a serious look at how the individual rates will affect us should one of us depart sooner than planned.
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Old 11-19-2021, 01:13 AM   #13
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I've never done conversions. I'll probably get hammered when I have to take RMD's, but up until then I don't pay any taxes at all. So I figure it's a fair trade.
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Old 11-19-2021, 05:18 AM   #14
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My plan is to keep doing large conversions through 2025 unless tax situation changes. I'll re-evaluate with tax changes. Then will continue doing smaller conversions until 70 and at that point (or at 72) do QCDs with what is left. That is the plan, but of course all is subject to changing with changes in market, taxes, and life.
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Old 11-19-2021, 07:24 AM   #15
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I did my first RMD last year, I stayed in the 12% tax bracket, I expect doing Roth Conversions in the 12% is a no brainer for our situation. However, I don't know if I should go into the 22% bracket, even though I have worked with this for a couple years.
I do know that if the stock market does just 9% over the 6 years until I get RMDs and 10years until my wife gets RMDs, we would have a forced income, SS, RMDs and Dividends over $170k, $100k of that RMDs. Maybe it would be wise to go up to 22% until 2025 and see what happens to tax rates then.
I might add we are quite comfortable spending $50k a year. Need to learn to BTD.
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Old 11-19-2021, 07:28 AM   #16
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I was doing Roth conversions for a few years but I scaled them back when I started getting health insurance on the ACA. Now, at age 60, I've stopped Roth conversions all together. About 1/2 of my savings are in an IRA and I will never be able to make a significant dent in that. With or without Roth conversions, I will be just fine financially for the rest of my life so I chose not to stress over maximizing the money I have left over when I die.
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Old 11-19-2021, 08:08 AM   #17
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I plan on starting in the new year and my plan is to continue till I get to RMD year.

I do have a dumb question. So, at ~72 I will be require to take RMD. So, what determines how many years your RMD lasts. So, at 72 if I live till 92 will there still be money left untaxed and requires RMD. So, can RDM last 30 years after your first distribution?
I have used a RMD calculators just to see about what I'm looking at for a number, but the years of distribution is something I don't understand.

Why I ask that question is because that also would factor into OP question for me.
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Old 11-19-2021, 08:31 AM   #18
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Yes, RMDs last forever because it's just a percentage of the remaining account.
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Old 11-19-2021, 08:32 AM   #19
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I plan on starting in the new year and my plan is to continue till I get to RMD year.

I do have a dumb question. So, at ~72 I will be require to take RMD. So, what determines how many years your RMD lasts. So, at 72 if I live till 92 will there still be money left untaxed and requires RMD. So, can RDM last 30 years after your first distribution?
I have used a RMD calculators just to see about what I'm looking at for a number, but the years of distribution is something I don't understand.

Why I ask that question is because that also would factor into OP question for me.
You're required to take an RMD every year that you are (A) age 72 or older and (B) have a traditional IRA with a balance in it.

So it starts at age 72 and lasts for the rest of your life unless you completely drain the traditional IRA to $0.

The RMD amount is just a percentage of your remaining traditional IRA balance - it starts at about 3.65% and increases every year based on an IRS table.

There are currently no RMDs on Roth IRAs.

RMDs on inherited IRAs are different and have different rules depending on several different factors.

There may be RMDs on 401(k)s and other retirement plans, but I'm not sure on that and don't have those so I don't worry about it.
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Old 11-19-2021, 08:50 AM   #20
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Yes, thanks to you both of you, for that explanation and I do understand most of the requirements. I just always thought it only lasted so many years an the account would be drained. I never had a grasp on that event. Thank You.

It does for an inherited I know that. It will also make a difference on how much and how long on the interest percentage you are earning each year on remainder of untaxed money.
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